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A multi-central bank digital currency (mCBDC) network could disrupt cross-border payments as they exist today and save global corporates $100bn in transaction costs annually, a joint research report published by J.P. Morgan and Oliver Wyman has found.
The lack of payment system interoperability can be costly and slow in the case of long correspondent banking chains. Disrupting and changing existing correspondent banking set ups has been a key use case for the development of wholesale cross-border CBDCs.
A new J.P. Morgan/Oliver Wyman report says that by removing correspondent banks from the payment cycle, mCBDC solutions could reduce the cross-border transaction revenue by around 80 percent.
“We believe an mCBDC infrastructure could be well positioned to achieve such a solution despite the effort needed by central banks to integrate and collaborate across jurisdictions,” the report says.
With nearly $24trn in wholesale payments being moved across borders each year, the report estimates global corporates pay more than $120bn in total transaction costs. This could be reduced to $20bn in case of using an mCBDC corridor network.
One of the world’s biggest correspondent banks, J.P. Morgan now says that an mCBDC network could disrupt correspondent banking in a way that it leaves billions in the pockets of financial institutions every year.
The bank has been working on improving cross-border payments through the use of blockchain for several years. In 2018, it launched a live blockchain service called Interbank Information Network (IIN), now called Liink, to facilitate payment-related information exchange and carried out successful cross-border transactions between banks in Taiwan and other markets.
“The benefits of streamlining cross-border B2B transactions can help banks carve out new revenue streams — not just for J.P. Morgan, but for its competitors as well,” Christine Moy, global head of Liink, told the press in March.
She explained that Liink’s services are similar to a wholesale model where banks can preserve their existing corporate relationships, and then repackage and resell to their corporate client. “It’s a network that has been growing use-case-by-use-case, starting with the basics of helping to ensure that accounts are open and operational,” she added.
According to the J.P. Morgan/Oliver Wyman report: “Naturally, an mCBDC solution would trigger a rethink on how commercial banks and other foreign exchange providers may deliver their current offerings, however, we are encouraged by the potential for new business and operating models, which could yield long-term benefits for all participants.”
Disruption of traditional payment arrangements
New mCBDC corridors would operate almost independently of legacy cross-border payment networks, as well as of the associated traditional clearing, settlement, and payment network solutions.
The impact could be felt not just across wholesale payments but also retail payments.
While many multi-CBDC experiments aim to improve wholesale cross-border payments, the Hong Kong Monetary Authority (HKMA) has recently published a list of 15 new use cases for its multi-CBDC trial platform, mBridge. The new use cases expand the project’s original goal which aimed to reduce costs and settlement time in cross-border payments.
Among others, mBridge participants say the platform could improve cross-border e-commerce by connecting small local merchants to international markets through low-fee and near real-time payments.
Another submission by Standard Chartered identifies opportunities in integrating layer-2 blockchains with mBridge, such as LOVAS, the Low Value Aggregation Service. The bank notes that the rapidly growing low-value cross-border payment segment is currently under-served by banks and believes that a blockchain network such as LOVAS could improve commercial C2C, B2B, and B2C flows by providing a low-value payments aggregation service to participating banks. The service would integrate existing domestic instant payment schemes with mBridge which would then enable multilateral clearing of low-value cross-border payments.
Other papers name opportunities to reduce risk in international trade by programming smart contracts in a way that settlement remains conditional on certain events, e.g., the delivery of a product.
Such a disruption in traditional cross-border payment services could hit large payments firms hard. For example, using CBDC for cross-border ecommerce could have a significant impact on card network revenues.
According to Visa’s 2020 annual report, the card giant earned almost 30 percent of its $21.8bn revenue from international transactions, which includes cross-border transaction processing and currency conversion activities.
That said, the card networks also see opportunities with digital currency. Visa has already announced an initiative to offer digital currency-related APIs and crypto partner wallets that enables USDC stablecoin payouts.
Similarly, Mastercard, which derived 23 percent of its 2020 revenue from cross-border volume fees, has launched a CBDC-testing platform for central banks.
Even SWIFT, which facilitates the vast majority of existing wholesale cross-border payments, is seeking to expand its role to a carrier of authenticated information about CBDC transactions.
Momentum appears to be gathering behind CBDC. Just a few years ago, the concept of CBDCs felt more akin to a high level discussion point. In some cases it was regulators and policymakers looking to strike back, fearing inaction could lead to them losing supervisory control over payments as people flocked to private cryptocurrencies.
Today, new initiatives and announcements are coming almost on a daily basis, and investment is beginning to focus on how consumers and business will actually use and benefit from these technologies.
